After more than two years since the retail investors forced the short squeeze case, a new regulation from the U.S. SEC has emerged: hedge funds with large short positions need to report monthly.

In 2021, the GameStop incident, where institutional investors shorted the stock but were squeezed by retail investors, is still fresh in our minds. On October 13th, the U.S. Securities and Exchange Commission (SEC) will vote on two new regulations, one of which requires institutional investors to disclose large short positions on a monthly basis, allowing individual investors more time to short stocks.

When shorting, traders borrow stocks they believe will decline in the future and quickly sell them. After the stock price drops as expected, they buy back the stocks at a lower price to return to the lender, profiting from the price difference. In the aftermath of the 2008 financial crisis, the U.S. passed a law requiring the SEC to collect more information on short trades, but it has never been enforced.

However, in January 2021, an epic short squeeze occurred. Citron Research, a professional research firm specializing in short selling, released a report stating that GameStop's stock price was severely overvalued and that several hedge funds had shorted the stock, even insulting retail investors who bought GameStop at high prices. This angered retail investors, and users on the Reddit community discussion board, WSB, launched a short squeeze by buying the stock in large quantities. The hedge funds that had shorted the stock were forced to cover their positions, causing the stock price to skyrocket from around $40 to a peak of $483. After several brokerages imposed trading restrictions, the stock price eventually dropped. This event resulted in significant losses for hedge funds such as Melvin Capital, and Citron Research announced that it would stop providing short analysis.

The SEC issued a report at the time, recommending that regulators seek better disclosure of short selling information from investors. Two years after this incident, the SEC is finally preparing to introduce new regulations. Its five commissioners will vote on two provisions on the 13th, one targeting the disclosure of large short positions by institutional investors and the other targeting brokerages.

The first new rule requires institutional investors to disclose transaction details to the SEC at the end of each month if they hold large short positions. The SEC will then aggregate the data and disclose the companies that have been shorted to the market. However, the SEC will not disclose specific institutional names or short positions. Nevertheless, investors will have a new time window to trade against the companies that have been shorted.

Currently, regulators have already required all brokerages to disclose their short positions twice a month. The new rules on the 13th will apply to hedge funds and other institutional investors. If an institution's short position in a company's stock reaches 2.5% or the average short position exceeds $10 million in any given month, it must be disclosed.

Representatives from the hedge fund industry expressed dissatisfaction with this new rule, stating that it will increase costs and not necessarily make investors safer.

The second new rule applies to brokerages and requires them to disclose the terms of each stock lending transaction to regulators, including the name and code of the stock, the quantity of shares lent, fees, etc. Brokerages must also confirm the identity of the borrower, such as a broker, retail investor, bank, or asset custodian. The SEC states that the goal of the new rule is to help both borrowers and lenders obtain fairer transaction terms.

Currently, there is limited visibility for regulators in the stock lending market, even though pension funds and other long-term investors are increasingly using such transactions to generate passive income. In a document released by the SEC at the end of 2021, it estimated that the total daily volume of stock lending transactions has reached $120 billion, compared to an average daily total of $475 billion for regular stock trading.